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Leasing Developments

Leasing Developments

Submitted by Brian H on December 14, 2012

It will be interesting to track the influence of leasing on sales and service. EU is set up to handle leasing, in advance of proper opening of the market (pricing and outlets, etc.) and now Canada has leasing (about 6 mo. in advance of the US).

tvn728 |
December 22, 2012

I am waiting for the availability of leasing of Model S car to place my configuration request although I got the notification to do so about 3 months ago. I have always leased my cars for my business for the past 15 years and threat of upcoming price increase is not going to influence my decision to wait. I am curious to know how many others in the reservation wait list are in the same situation as mine.

ghillair |
December 22, 2012

@tvn728: You should check with your tax accountant! I believe the $7,500 tax credit is only on cars purchased for private use. I think they can be leased, but not by a business.

This is what you pay an accountant for.

Timo |
December 22, 2012

What is an "tax accountant"? Never heard of one.

Brian H |
December 22, 2012

An accountant who specializes in arranging affairs to obtain the most favourable tax treatment, and who is familiar with the tax code and its provisions, exemptions, etc.

Pungoteague_Dave |
December 23, 2012

These cars are unlikely to be good leasing candidates for a couple years, and maybe never. The problem is the built-in obsolescence factor is a bigger unknown and nearly impossible to underwrite.

At this point we know little about the o/s that drives everything, but the fact is that we own computer-driven autos like none other in history. That lends comparison to computers - how much is a five-year old computer or cell phone of any brand worth today? Zero, maybe less considering disposal costs. How much support does Apple or Mac provide today for a 10-year-old operating system/computer? Zero.

Leasing companies pretty much have to assume the world will have moved on from these cars within a similar time frame as PC's and cell phones. That's not true for ICE vehicles, which have a much longer historical track record in terms of value (hence residual computations in lease terms), and despite model obsolescence, are not technologically obsolete after 10 years, albeit dated.

Bottom line is that the Model S deserves a much lower residual value in a lease price computation than a similar-value ICE, so the month payment comparison will remain whack unless/until the baseline assumptions described above change.

djp |
December 23, 2012

What makes this computer worth less than the 13 or so in a typical car? This one can be reprogramed over the air - the others not so much so.

Pungoteague_Dave |
December 23, 2012

djp,

The difference is that the computers in other cars are not basic to the entire design - they are special-purpose for running individual elements of the car's mechanicals. Therefore they can be swapped out without consideration of software version, ROM upgrades, etc - they are static and the specifications don't change.

Computers on other cars also don't require comprehensive 3rd-party operating systems that will eventually be orphaned like the one in the Model S. Don't get me wrong, I love the Model S and will soon take delivery - but it is realistic to assume that the car will be essentially worthless after 10 years. If not worthless, at least more obsolete than other cars purchased this year. Again, what would you pay for a 10-year old Apple Mac or a 10-year old cell phone? Zero. We will probably still be able to get better support than is available for obsolete PC's or cell phones, but there will be a day when Tesla will say "we are no longer providing software support and upgrades for cars built before x date."

Think about the cell phone technology that is built into the Model S - the chips will soon be ancient - they are already obsolete on every car now being delivered. The chips we get now won't even be available to a manufacturer three years from now - all of the Tesla's being delivered now have only 3G capability - and that is computer hardware chip-based - no software update can ever give us 4G-level capability or speed.

Part of the Tesla schtick is that the cars will receive upgrades. That is only true to the point that new software updates will work with the hardware we are getting now. Any Tesla built three years from now will have dramatically different physical content, including firmware, compared to what we are getting now, just as is true of all computers. That's not a guess - it is historical fact. It is impossible to put the latest versions of the Android operating system onto Android smartphones that are three-years old because the hardware cannot support the newest software features. We will see similar things with our cars.

Much like our disposable cell phones, we will see newer Teslas with features that cannot be retrofitted or downloaded, and will be encouraged to upgrade to new 'hardware'. But what the leasing companies have to consider in the residual value calculation is that unlike almost all other cars on the road, there is no CarMax to buy a Tesla, because CarMax cannot service, appraise, or even charge these cars. Teslas will remain rare even at the 20K/yr unit level, and the CarMax business model would not justify their investing in becoming Tesla-friendly. Same for the used-car trade-in and auction business (how will they auction cars they cannot drive due to depleted batteries?).

There is no trade-in market for the Tesla roadster except at Tesla dealers. CarMax will buy almost any late model car on the road, but not a Tesla. This is why Tesla is establishing their own aftermarket. Because it will likely remain impossible to trade in a Model S at a Mercedes or BMW dealership, resale value assumptions implicit in leases will assume faster depreciation, if they assume anything at all.

Joyrider |
December 23, 2012

Pungoteague_Dave Nearly everything in many ICE cars is computer run. Despite your attempt to explain I am at a loss to understand how the computer(S) in a Tesla are any different. The operating system is Tesla designed...if they do what we all hope and are a thriving company in ten years time there is no way they would do some design which junks a large number of cars they previously sold...and as far as I can see no need to, in order to offer whatever the latest technology happens to be on their then current production.

To me what will determin long term value is how the battery packs hold up. Who is going to buy a 5-year-old car if the range has already dropped significantly. And worse yet, how much will a car be worth if essentially you know in three years the main and most expensive component will have to be replaced. What would an ICE vehicle be worth if you knew ahead of time the engine will have to be replaced in 3 years time: nothing.

It is not the computers that are going to determin the used value of a Tesla, it is the battery pack. As battery technology moves along hopefully this will become less of an issue...but now it is my chief, and only concern, on my car retaining a significant long-term value.

Brian H |
December 24, 2012

P_D;
And I think you may be wrong about the 3/4G hardware. The MS is designed to be highly modular, with swappable functions. On person was told by a tech that the 4G module is already there, awaiting activation. And so on.

Brian H |
December 24, 2012

typo: One person was ...

Pungoteague_Dave |
December 24, 2012

I was told no 4G ever - at the DC sales office. But whatever, something else will replace 4G a long time before 10 years is up, and the cars won't have that either - but any new Tesla will have it. I did not say that the computer is the only example of technology that reduces the likeihood of reasonable lease terms or functional obsolescence. It is one issue. I also did not say that Tesla will intentionally orphan these cars. It will happen by default - the technology will walk away over time. That's a good thing for mankind, and a reason to upgrade if you own the old technology.

There is a fundamental difference between the specific-purpose computers in ICE cars and the computer in the Model S. Your point makes my point. I was an early adopter of in-car NAV systems in the late 1990's. In 2000 I bought a BMW 330ci convertible, factory delivered. It had a BMW NAV system. Pure junk today. The rest of the car is just fine, but it you want a current map for it none is available - you have to use a dash-mounted unit because you are SOL for the OEM unit. It isn't BMW's fault, but the technology moved further faster than their ability to provide updates. The resolution on those first-generation screens was terrible anyway (magical at the time, just like our new Model S screens today - but they won't be so hot in a few years - and they will no longer be supported by the supplier and software developer, which is not in Tesla's control).

My pointis that from a pure financing perspective, no responsible leasing company will take the residual risk represented by untested technology - the accountants must assume a low residual value until proven otherwise by a robust secondary used car market emerges for electric vehicles.

Sudre_ |
December 25, 2012

I was right with you Pungoteague_Dave until, "but if you want a current map for it none is available". That is because BMW did not care about updating it when they designed it. I have had a 2003 desktop computer and the maps are still current. It uses google maps and they stay current as long as google maps is out. My first tablet is also no where near obsolete altho only three years old. It still does everything I need and more as I discover new apps. I did not buy a 2, 3, 4, or 9999G tablet. I bought a Wifi tablet and tether it wirelessly to my cell phone. As my phone went from 3G to 4G my Tablet did too.

I know many people say they wouldn't buy a phone just for the car. If you are signing up for a data package 5-10 years from now the phone will be, like now, practicality free. If it's not go find a different provider. The car will always need a data package to connect.

As compared to an ICE I think the BEV will depreciate slower because of gas prices. I just don't see gas prices dropping back to 97 cents or less a gallon. At a modest rate of increase the US national average will be $5 a gallon in ten years. At that cost driving 2000 miles with an ICE will buy you a new battery+ for your Model S. People who can only afford used cars will have a choice. By a Leaf that has a battery which only gets 20-40 miles at most per charge or buy a base priced used Model S that gets over 100 miles to the charge.

djp |
December 25, 2012

Sudre - well stated. I didn't have the energy to respond to PD

Joyrider |
December 25, 2012

Also, how much does it cost to upgrade hardware, today...memory, processors cost relatively nothing.

Is there any reason not to believe Tesla engineers didn't design the Model S for easy hardware updates if that needs to be done in the furure?

If computer hardware does become obsolete it certainly will be an inexpensive swap out assuming the car is designed for it...
shouldn't cost much more than a major tune up of an ICE car.

Pungoteague_Dave |
December 26, 2012

Just try to upgrade a three year old Apple Mac. Can't be done. But live in upgrade dreamland if you want. I live in the real world of finance. i am also a Model S owner effective next week, so buy the koolaid. However, i am realistic about it. These cars will never have 4g, folding mirrors, rear seat heaters, proximity sensors, adaptive cruise control, and will never be good candidates for leasing due to their unique market position and above average depreciation/obsolescence. Anything else is either wishful thinking or intentional self-delusion. Computers have been sold for years on the myth of future upgrade ability. But 99% are never upgraded because the cost benefit isn't there, as the three year old processor is already slower than new computers at half the cost, and too old to run the latest o/s version.

Yes, Tesla probably modularized these cars, but things like bus speeds, hard drive transfer rates, and hardware interface methodologies are locked into the base vehicle forever, and and this technology evolves rapidly and constantly. Just ask anyone with an older ipad without any phone interface or camera. They can't be added now and those iPads are being donated to Goodwill. This isn't planned obsolescence. It is the speed of technological advancement, now orphaning any hardware purchased this year within a year or two. How many five year old printers do you use at home or work? None. And you can't buy ink for a ten year old printer any more. The more advanced/complicated the vehicle, the quicker this will happen.

Joyrider |
December 26, 2012

P_Dave...
We actually have the same bottom line: the Model S is unlikely to be a good leasing candidate for some time.

You think it is primarily because of the computer system, I think the main culprit will be the batteries.

I will be quite interested to see what the leasing program will be when it is announced in the new year. I would rather lease my first Model S because I am concerned about it retaining its value as the batteries (and computers) age.

Brian H |
December 27, 2012

P_D;
And I expect about half your predictions above will be disproven within a year, or less. We'll see.

Timo |
January 8, 2013

@Brian H +1.

mwojcie |
January 11, 2013

I think leasing will become possible as resales start happening establishing a market for the model S. There are plenty of Tesla Roadsters for sale on several websites like AOL autos and others - 5 year old roadsters - 2008 model - list for $69,000 to $85,000 right now - not too bad. The value of the Tesla is in it's uniqueness, and it's ability to not need a $100 tank of gas. I fill up my SUV every week for $100+ - that's $5,000 per year just in gas. That adds to the resale value and that fact that it's a funtioning car. Your not buying a used computer - your buying a used car that drives from point A to point B - as long as the computer in the car still works and the car still drives - and doesn't need any gas - it will have value. How much is a funtion of market forces and what else is available at the time that provides a similar value. Of course that's hard to predict and that's why leasing isn't available right now - but I'm sure there is some leasing company out there that will do a lease at the right price! Of course Batteries and computer upgrades come into play just like replacing a transmission or a whole new engine on an old car can factor in. Also remember that with such low production volumes - these will be collector cars in 20 years. They produced roughly 300,000 1969 Mustangs - depending on how rare the exact version was determines the value - ie the basic models sell for $2,000 to $20,000 right now, the Shelby GT350 Convertable of which they only made 194 could fetch upwards of $200,000.

gocken1 |
January 12, 2013

Pungoteague_Dave you can not compare a car to a computer. The Model S is primarily a car. It has a computer (that happens to be better than other car computers). A Apple computers primary function is to be a computer (and it can be upgraded because I have done it). The computer is 100% computer. The Models S is maybe .2% computer by cost or even less if you look at it by weight.

djp |
January 12, 2013

gocken1 +1

FLsportscarenth... |
January 12, 2013

A leasing incentive for north american PHEV/BEV vehicles for corporate fleets would be a prudent policy for any national or state/provincial level government... Write your congressman/state legislator/Member of Parliament...

A tax credit based on how many/held for how long...

An idea...

Superliner |
January 17, 2013

@ Pungoteague_Dave

It seems you are on point IMHO I had a car with a fully functional analog cell phone integrated into it. Guess what? within 6 years there was no more analog coverage and it became useless junk. Eventually 1X and 3G will be gone 4G is current but VOLTE is right on the horizon and todays model S likely won't have that either.

While the cars probably won't be junk in 10 years, spending ??K dollars to replace an aging battery pack in order for the car to have reasonable resale value might be a tall order when the likely offerings from Tesla 10 years from now "assuming they survive" will most likely have superior capabilities / batteries etc.

Early adoption is a gamble with uncertain outcomes but I'd bet the residuals on Model S 10 years down the road will be much lower than a comparabley priced ICE purchased today. because, technology marches on.

Sudre_ |
January 17, 2013

I was really thinking a better resale value but now Tesla has announced no upgrades on the batteries in the future. That means even with a new 85kWh battery the car will seem like ancient history since the new BEVs will probably have 120 or 160kWh batteries.

As long as there is Wifi or USB the car's 3G, 4G, 25923G will be upgradable with a tethered device or USB plug in.

Brian H |
January 17, 2013

I doubt Tesla will be in control of those options by then.

l_younis |
January 20, 2013

Interesting discussion. I understand daves concerns, but I agree with the other guys, you can compare this to a computer. BTW I just update a 5 year old mac, its possible. I also think you cant compare it to a traditional car, what other car can you get updates over the air? This is a true melding of technologies. Musk just offered Boeing help with their batteries. That is confidence. The hardest part to get past is people that dont do their homework and discredit the work that tesla does. Its a true paradigm shift